UK: the AIC Code of Corporate Governance

The Association of Investment Companies has published an updated edition of its Code of Corporate Governance for Investment Companies.

The purpose of the AIC Code is to provide boards with a framework of best practice for the governance of investment companies. The AIC Code is built around an understanding of the needs of shareholders, in other words what shareholders want or expect to achieve by holding shares in investment companies. The following sets out what investment company shareholders want, the role boards play in delivering these objectives and the fundamentals behind the AIC Code.

What investment company shareholders want:

• The best possible share price total return with an acceptable level of risk consistent with the objectives of the company;

• Clear objectives and transparent investment policies so that they can understand what they are buying and the risk:reward dynamics that apply;

• A low expense ratio consistent with proper incentivisation for outstanding performance and quality service;

• Good liquidity so that they can sell (or buy more) shares easily; and

• Good communication from the board and fund managers.

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The role boards play in delivering against these objectives:

• To bear the ultimate responsibility to shareholders at all times and over all issues notwithstanding any delegation of responsibilities to third parties;

• The provision of an external view to support and add a different perspective to the manager to help optimise performance;

• Striking the right balance between cost control and incentivisation to retain as much value as possible for shareholders whilst providing appropriate encouragement to managers to deliver superior returns at acceptable levels of risk;

• The provision of an objective view on the benefits and timing of gearing decisions;

• Ensuring that marketing, promotion and investor relations are conducted professionally, efficiently and cost effectively;

• Objective monitoring of fund manager performance and willingness to press for remedial action if necessary;

• Monitoring and responding to shareholder opinion;

• Regular review of the structure, objectives, target audiences, fund manager and continued existence of the company;

• Maintaining proper internal controls;

• Ensuring that effective shareholder communications are established; and

• Ensuring that the fund manager manages within the agreed parameters set by the board.

Fundamentals behind the AIC Code:

• Directors must put the interests of shareholders above all others;

• Directors must treat all shareholders fairly;

• Directors should be prepared to resign or take steps that could lead to a loss of office at any time in the interests of long-term shareholder value; and

• Directors should ensure that they address all issues of relevance and that they disclose the outcomes of those deliberations in a way that shareholders with limited financial knowledge can understand.

For downloading complete code click here (pdf).